Real EstateIPO / M&A

Compass rivals question path to profitability

Critics say brokerage inflates revenue figures

Compass’s S-1, a disclosure the company filed Monday as a shareholder pitch, runs over 250 pages long.

But nowhere in the voluminous filing, observers say, is a lucid argument as how Compass might become profitable.

“They showed a $270 million loss in an insanely booming housing market,” noted Jonathan Miller, a real estate appraiser at Miller Samuel.

The S-1’s main sales points, especially an introductory section where Compass walks through its agent-friendly technology, “seems to show how little they understand the brokerage space or are just ignoring it,” Miller said.

Compass and its CEO Robert Reffkin have likely braced for such criticism.

Going public appeared a logical next move for the nine-year-old real estate brokerage. Compass is a venture capital fundraising force, raising $1.6 billion total (34% of the company’s common stock shares are earmarked for a Cayman Islands subsidiary of the Masayoshi Son-led SoftBank Vision Fund, the brokerage’s biggest VC backer). It has also gobbled up market share in its home turf of New York City and across California, among other locales.

An IPO would mean another capital influx; Compass has not set the date of an offering, or provided an estimated share price. But the move also draws fresh scrutiny to Compass’s quick ascension.

Take revenue.

Compass reported $3.7 billion in 2020 revenue. That’s a tenfold leap from three years earlier, when the company generated $370 million in 2017 revenue. It’s a leap that might make the company’s $270 million net income loss last year look relatively smaller.

But the reported revenue is gross commissions, not what money Compass actually takes in.

In other words, if a Compass agent sells a house for $1 million, and gets a 3 percent commission, Compass is calculating that $30,000 as entirely company revenue.

In reality, Compass retains a small split from the sale, about 17 percent (or $5,100 in the $1 million sale example), and the agent pockets the rest.

For 2020, the agent’s cut shows up in the S-1 as $3.1 billion “in commission or other transaction related expenses.”

Michael Nourmand, a broker at Nourmand & Associates in Beverly Hills, said that tallying revenue before the agent’s cut is misleading. The broker asserted that Compass really made $664 million in 2020 revenue – or reported revenue minus commission “expense.”  

“There is rarely anything straightforward with Compass,” Nourmand said.

By other measures, the brokerage won kudos from industry observers, including $152 billion in reported 2020 home sales volume. That firmly puts Compass in the top five nationally among brokerages, and it is about 4 percent of U.S. market share.

“They are a force in the brokerage space,” said Nick Solis, an industrial consultant at One80 Realty in San Francisco.

But the S-1 Solis said, also shows a company reliant on commissions for revenue. To achieve profitability, Solis said, Compass must expand its nascent title and escrow program as Realogy and other competitors have, or “Find a way to monetize their data.”

The S-1 uses the word “data” 139 times, and “technology” 164 times.

But sentences like, “Key investment areas for our platform include continuing to build an integrated platform to help out agents win more clients, generate more transactions and accelerate our data integration and analytics,” tripped up readers of the filing.

“I do not see any identifiable technology advantages from Compass over other brokerage firms,” said Ken Johnson, a real estate economist at Florida Atlantic University. “Compass appears to be another real estate franchise with a bit more integrated use of technology and aggressive marketing.”

Compass does assert that agents are using its tech, stating, “88 percent of agent teams use Compass technology at least once per week, of which approximately two-thirds used it daily.”

But the filing does not give the median number of agents per team, a few of which, like L.A.’s Aaron Kirman Team, include several dozen members.

Rival brokers took umbrage at Compass’s claim that tech for the agent (as opposed to the consumer) was “largely ignored” until its agent tools came along.

“They act like they are reinventing the wheel, while everyone else is at a standstill,” said one Compass rival, who is a California broker, and judged Compass another struggling company in a difficult industry.

“If it walks like a duck and talks like a duck,” the broker said, “It’s a duck, not a unicorn.”

One problem the S-1 flags that may not amount to much worry is financial reporting. Compass allows that they have a “material weakness,” in their reporting. But Steve Murray, co-founder of RealTrends, does not see an issue. “I have advised on the sale of five brokerage firms they have bought and found them capable and very well organized,” Murray said.

Comments

  1. Am I understanding this correctly ?

    Simple shoe box accounting.

    For every $1.00 dollar that is was generated in cash inflow in a record breaking 2020 white hot real estate market Compass spent $1.45

    2020 Loss as a % on true cash inflow of $600,000,000 was $270,000,000 or minus 45%

    How do you value a company that spends $1.45 to generate $1.00 ?

    More volume is not the answer nor is more volume probable as rates rise and activity softens as we make our way through 2021

    How do you value a company whos revenues decrease and continues to lose money?

    How do you value a company who has NEVER been profitable and will NEVER be in an industry where margins are only heading south?

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